Early-Stage Entrepreneurial Financing: A Signaling Perspective

40 Pages Posted: 15 Mar 2012 Last revised: 8 Feb 2016

Jin-Hyuk Kim

University of Colorado at Boulder

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 1, 2015

Abstract

We analyze an entrepreneur's choice between angel and venture capital (VC) financing in a competitive investment market, where the entrepreneur seeks to maintain his ownership share as well as equity value. The key to our analysis is the idea that a negative signal is inferred by the market if an inside investor chooses not to follow on a subsequent investment. We first show that when ventures are ex-ante identical, entrepreneurs retain higher ownership shares by financing with angel investors who commit to not participate in a future round. When entrepreneurs are ex-ante heterogeneous, there is a separating equilibrium where entrepreneurs with higher (lower) likelihoods of success choose VC financing (angel financing) in the first round.

Keywords: Entrepreneurial financing; insider signaling; venture capital; angel investing

JEL Classification: G14; G24; D82

Suggested Citation

Kim, Jin-Hyuk and Wagman, Liad, Early-Stage Entrepreneurial Financing: A Signaling Perspective (August 1, 2015). Available at SSRN: https://ssrn.com/abstract=2022621 or http://dx.doi.org/10.2139/ssrn.2022621

Jin-Hyuk Kim (Contact Author)

University of Colorado at Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

565 W Adams St Suite 452
Chicago, IL 60661
United States
7739809883 (Phone)

HOME PAGE: http://lwagman.org

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